Wednesday, May 28, 2014

Beating The Business Cycle

Wouldn't it be nice to be able to tell six months before a recession takes place? In Beating The Business Cycle, the authors claim they can.

To give themselves credibility, they talk about how they have successfully called previous recessions. They disparage other groups in the process: their naysayers, and others who think they can call recessions, with an attitude that only they have the right indicators in the right combinations that can predict the direction of our complex economy. They also discuss some of their clients, making themselves sound all legit in the process.

They are pretty convincing, which is what the first two thirds of the book is all about. But when it actually comes to using/interpreting the data in Part 3, I find the process gets a little bit wonky. There is some subjectivity in interpreting the data, and so it can always be fudged after the fact in my opinion.

But what I think is the biggest problem with their line of thinking is the problem with all macroeconomic predictions: behaviours change in response to new findings. So even if they were good at predicting recessions at one time, changes in behaviour (e.g. the Fed starts using something closer to these indicators, and changes policy in response) may render future predictions useless.

While I think using certain industry indicators can be useful for companies which would like to know near-term customer demand, I think this kind of thing is almost useless for stock investors. I remain unconvinced that looking at anything beyond individual companies has utility, because of the behavioural changes that seem impossible to predict. Indeed, since this book was written, I've read various reports about how bad their predictions of late have been.

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